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Comment by sssilver | Hacker News Reader

I'm always confused by prices of "highly regulated" goods in the United States.

When I get a $150,000 bill for a 15-minute hand-reconstruction surgery, how much of that bill is the total margin vs self cost? And how much of that is warranted / acceptable?

When a single Tomahawk missile bills the taxpayer $3,600,000, how much of that bill is the total margin? When I say "total margin", I mean not just the margin of the company that builds the Tomahawk itself, but the margins of all the components that were used in it -- every last bolt and every ounce of aluminum.

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There are a great many costs built into the system that this analysis won’t get you: mandatory useless ingredients, arbitrary standards, and pervasive regulations.

I worked in aerospace and know a bit about this. Say you want to make a missile. Well, you better have the paperwork for literally every component to show that the metal used in all of it originates from a foundry in one of a tiny handful of countries.

That sounds superficially reasonable. The supply chain should be trustworthy and reliable.

I agree. We want to expect competence at all levels of the private and especially public sectors, but we're only able to insist upon it in a few key areas (aerospace, medical devices, etc.)

It is funny to see the same story every time. It's all burdensome regulation by the nanny state until something goes very very wrong and the public wants answers NOW, at which point it's incompetent government getting led by the nose by monied interest groups and their public relations departments.

This is exactly what happened with Brexit. Bunch of people voted to leave the burdensome EU regulation environment, then realised they quite liked workers rights so they don’t get fired in an instant, having food quality standards was actually pretty good to protect us from chickens filled with hormones and they didn’t want a bunch of infrastructure built in their back yard so environmental regulation was also quite useful.

The real problem isn't the price of the missiles. I wouldn't even care about the price of the missiles if they actually worked. But Iran kicked our butts. We don't have air superiority, we cannot guarantee the shipping of oil through the straight of Hormuz, or anywhere else in that hemispheres, our bases and our aircraft carriers are useless.

I wanna know what they've been doing with our trillions of dollars, because it sure as heck wasn't making an effective military.

They ate the money. They got really fat and slow.

The unknowns of defense spending is a feature and not a bug - for defense contractors

The us military has been a wealth transfer mechanism for decades.

RTX, formerly Raytheon, has the same revenue and net income as PepsiCo. PepsiCo has a higher profit margin.

Most of these companies are public and you can find their stats.

A Tomahawk missile is $3.6 million because it uses specialty components, all made in small batches using very expensive American specialist labor. It's also staggeringly more capable than a drone, or a shahed. Those extra capabilities are enormously expensive, because they are hyper niche.

A single American Artillery Shell is $3000.

Meanwhile, your $150k surgery bill example is completely different. It's a fake number, made up to cause a process to generate an actual, intended price somewhere. Your insurer and the hospital play some insane game of chicken where the insurance promises only to pay a percentage of what they are billed and so the hospital submits a fake number to get what they actually want (or nowadays the system is even more byzantine)

Ukrainian FP-5 Flamingo has 2x official Tomahawk range and payload and costs ~$600K to make with minimal margins.

I think most of the cost is in R&D

If you were to count the margin of everything it would be 100%. At the end of the day everything is either a resource harvested from the earth or human labor.

Help me understand this.

There's the cost that the employees pocket, and then there's the share that the shareholders pocket, right? Doesn't "margin" represent the latter?

100% of the money ends up going to people.

It’s not like you get to the end of the chain and trade a fistful of dollars with the ingot of aluminum itself.

Sure, the concept of money is only meaningful / valuable to humans.

But isn't there a conceptual difference between the "owners" of the Tomahawk factory vs. the people who are actually putting the missiles together?

Of course, but it’s not so clear in terms of the question you asked, and certainly not in terms of government procurement.

Those workers are often organized and unionized. They exert tremendous political influence to, say, require the factories to employ unionized labor and extract above market wages. Surely the differential between union and market wage should factor into your margin calculation?

The factory owners are only too happy to oblige. If you have a cost-plus contract with the government (so a contract that guarantees a certain margin), then the only way to get more absolute profit is to have higher costs. Defense procurement is best thought of as being totally price insensitive. In fact, almost everyone in the chain benefits from higher costs: the workers, the suppliers, the corporations, the military leadership, the politicians, and their constituents. The only people hurt are those future casualties of a less capable national defense, mainly soldiers.

Everything is human labor. There is no such thing as a “resource” without human labor to convert raw earth into something useful.

Two things that are necessary are both necessary. That doesn’t mean one collapses into the other.

IP at the margin?

Everything is food and air. There is no such thing a "human labor" without food and air to sustain it. I'm not sure what your point is.

The more common concept of margin used in this context is net profit after expenses, including labor expenses. The question is therefore roughly "How much is purely for capital profit taking rather than directly involved with compensating labor and purchasing materials?".

Those margins are the cost of Capitalism.

Many defense contracts are cost plus. https://en.wikipedia.org/wiki/Cost-plus_pricing

Nope. Very few defense contacts are still issued on a cost-plus basis. Especially not those for serial production of existing munitions.

25% (many) of the contracts awarded in this notice are cost plus. https://www.war.gov/News/Contracts/Contract/Article/4314128/...

Contracts are announced daily during the week. https://www.war.gov/news/contracts/

I provided the Wikipedia link to explain this contract structure because most people working outside defense have never heard of it. I didn't hear of it myself until talking to someone awarding defense research contracts, where these kinds of contracts are the norm. The Tomahawk missile contracts are not cost-plus, as you have said.

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